Confidentiality: An Issue for Co-op Boards

Plus: Sample Code of Ethics for Cooperative Directors

The question of confidentiality for consumer cooperative boards of directors is one of the toughest issues facing them. On one hand, the American Bar Association recommends that directors deal in confidence with all matters involving the corporation until such time as there has been a general public disclosure. On the other hand, co-ops actively encourage broad-based member participation In a manner that calls for full reporting of many complex matters before the board -- a high degree of disclosure.

However, this contradiction is not quite as large as it initially appears. The ABA's recommendation Is intended to protect board members under federal securities regulations, which require confidential treatment of certain information until there is a disclosure made to the general public. But these regulations are aimed at corporations malting public stock offerings and generally do not apply to cooperatives. This allows a cooperative's board members to communicate freely with their membership on most matters.

Where should you be careful? First, if publication of the information would jeopardize the co-op or put it at a competitive disadvantage, disclosure should be avoided. The second major area coi~cerns avoiding libel and slander issues.

While the present article is not a throrough legal review, several general precautions can be suggested: Give special attention to board activities In any of the areas just mentioned. When considering matters that may require confidentiality, move the board meeting into executive session, including only directors and any others invited by the board. Consider carefully the consequences of possible decisions and publication of the same. Be sure the board minutes record accurately what is decided -- and with a level of detail that is prudent and appropriate to the topic. If needed in specific problem situations, consult your attorney.

Let's examine some real examples of situations that placed co-ops and their directors in an exposed position:

Example: Personnel Matters

The board met in executive session and agreed to terminate the general manager. The general manager agreed to resign instead, and on that basis no finding was made as to the reasons for the CEO's departure.

This Information was leaked to the press. A board member was called by a reporter who obviously knew all the facts and asked for confirmation by a board member. The board member, figuring the damage had been done, agreed. Subsequently, a newspaper article appeared citing the board member as the source for the information.

The board member and the board were then in a liability exposure situation. In this case, the end result was than an otherwise outstanding director was forced to resign.

Example: Personnel Matters

An area where I know of no established precedent, but one to watch out for, would be disclosure through gossip that an employee has AIDS. Today, several companies and directors are facing suits for passing on "gossip" with no explanation of why the person they told had to know this as part of their job.

Example: Real Estate Acquitision

A co-op wanted to buy a piece of property adjacent to its existing store for future expansion purposes. The board, in discussing the matter, concluded that it should be kept confidential, and that the small size of the parcel/price did not raise significant membership issues. The board report in the co-op's newletter, written by a director who disagreed with the majority conclusion, carefully reported the debate.

The listed price of the property increased 35 percent the day after the newsletter was published, and continued to climb throughout the negotiations process. AdditiQnally, the co-op office was besieged by calls from members who wanted to buy the property and then resell it to the co-op at a significant profit!

In this case, the board decided that the board chair should review all future board reports prior to publication to insure that they reflect the majority view. The offending board member was informed that future misconduct of this sort would result in public censure. The value of the property so exceeded the appraised value that no bank would finance the co-op's purchase. Approximately three years later, the price came down, and the co-op was able to buy the property.

Example: Lease Negotiations

The co-op's existing lease came up for renewal. The co-op proceeded to enter into lease negotiations, which went very badly. The property owners didn't agree among themselves, and an agreements reached with one would not be accepted by the other. Given the situation, the co-op didn't have a new place to move to, and members, workers and board became angry and frustrated. The situation caught the ear of a friendly reporter, and a story was published. Quotations appeared indicating that the landlord failed to provide adequate upkeep under the existing lease provisions for heating and that the owners were lying in saying they wanted to lease the co-op.

The co-op was subsequently threatened with suit for libel and slander. The prinary defense for the co-op would have been that the comments were not authorized, putting the co-op in the position of potentially having to sue its employee and board member for any damages it might incur. Additionally, the co-op Insurance carrier disputed whether its coverage would apply in this circumstance.

In this case, in exchange for a release from all claims for libel and slander, the co-op and the employee and board member involved Issued a joint statement to the press and in the co-op newsletter. Since a settlement was negotiated prior to a suit being filed, there was no affect on Insurance rates. However, since positive press doesn't make a news story, the press got bored and moved on. Subsequently, landlords would not deal with the co-op, fearing bad press or that the co-op was hard to work with.

Example: Litigation

In executive session, the co-op board discussed and agreed upon a settlement of a pending lawsuit and a strategy for negotiating that settlement. A board member disagreed and disclosed the settlement publicly. The board did nothing.

In this situation, if the co-op suffered a loss of assets through this conduct, the board member certainly would face the possibility of liability. Even more troubling Is the question of whether the other board members, who neither took action nor made comments regarding the actions of the offending board member, could be in a liability situation. Certainly a reasonably prudent person could envision additional breaches of confidentiality by such a director.

Overall observations:

The above examples were meant to red flag common problem areas and to put board members on alert. Since In cooperatives the Individual directors tend to have relatively small investments compared to those by directors In public companies, this could mean that board members would not be subject to as much liability exposure even when they do get In an exposed situation. The primary group with the largest Investment In the company, and hence most likely to sue, Is the creditors. Even though member suits are not common, that Is no excuse for not meeting your full responsibility to members. They have elected you and have faith that you are doing a good job.

In conclusion:

A good orientation of directors will Include a review of areas Involving confidentiality, and discussion weighing the need for confidentiality versus good communication with members. Having a signed board code of ethics prohibiting activities which breach confidentiality is a good preventive approach and is strongly recommended.

Sample Code of Ethics for Cooperative Directors

The Board of Directors believes it to be expedient and proper to adopt a Code of Ethics to clarify any uncertainty which may now or in the future exist regarding the authority exercised by the board or individual directors, and general rules applicable to directors' conduct of co-op business. The bounds of authority as proposed herein serve as a medium by which greater unanimity and closer coordination can be effected between directors, and among directors, management and employees.

The Board recognizes its authority as being limited to overseeing the affairs of the cooperative in a manner deemed beneficial to the cooperative as a whole; to employing a Manager to be responsible for the overall and day to day management of the business under the direction of the board; and to effecting other duties as provided by the bylaws or by general or specific corporate laws.

The director recognizes that, except when the board is in formal meeting, his/her authority is equal only to the rights and authority of any individual member of the cooperative and that no individual director may take action on behalf of the cooperative alone unless explicitly delegated that authority by action of the Board.

The Board recognizes the authority of the Manager as provided in the bylaws or as established by general corporate practice to manage the affairs of the cooperative. The Manager shall employ, supervise and discharge all employees, agents and laborers and engage in all negotiations and discussions on behalf of the cooperative as necessary and/or directed by the Board.

The Board agrees that while an individual director may disagree with a policy or action adopted by a majority of the Board, s/he should support said policy or action as being the considered judgment of the Board. Such an individual director shall have the right and duty to present further evidence and argument to the Board for further consideration in a manner consistent with the Board's practices, and the Board shall have the duty of reconsidering its actions appropriately.

The Board and each individual director agree that individual directors shall use the utmost of professional judgment and discretion in discussing disputed or confidential corporate actions, policies or issues with co-op members, employees or the general public. All personnal, real estate, marketing, strategic planning and financial matters will be considered sensitive issues subject to director's good faith and discretion unless or until made specifically clear by action of the Board as a whole.

At all times directors shall recognize that they are seen as representatives of the cooperative and shall conduct themselves in a professional manner which fosters confidence and reflets positively on the cooperative, its members and its staff.